The Best Case Scenario

As the market decline has accelerated, many are panicking and some are concerned over a new bear market, so MoneyShow’s Tom Aspray studies the charts to determine what needs to happen next to stabilize the market.

The Dow Industrials plunge below the 16,000 level early Wednesday afternoon was consistent with panic or margin liquidation. The decision by AbbVie, Inc. (ABBV) to not recommend the $52 billion acquisition of Dublin-based Shire (LSS:SHP) did not help as many hedge funds were heavily long Shire, which dropped 30% on Wednesday.

According to many money managers, their clients are panicking as the decline has accelerated with many concerned over a new bear market. But it is somewhat puzzling that the latest survey results from the American Association of Individual Invests (AAII) shows that the bullish % increased this week to 42.66% from 39.88% the previous week. The number of bears rose slightly from 30.98% to 33.70% this week.

The futures are showing sharp loses in early trading with the Dax Index down 1.61% while Spain and Italy are down over 3%. Of course, crude oil prices have led the market lower with the December crude oil contract dropping below $80 per barrel.

So what can traders and investors expect next?

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Chart Analysis: The weekly chart of the NYSE Composite shows the intraday drop to a low of 9886 before it rebounded to close at 10,109.

The weekly OBV (not shown) has dropped well below its WMA, which is now turning lower.

What it Means: There are no signs yet that the selling is over though the reversal Wednesday is a slightly positive. The recent action in the iShares Nasdaq Biotechnology Index (IBB) and the Vanguard MSCI Emerging Markets (VWO) is encouraging, especially if it continues. A sharply higher close is needed to stabilize the market.

The best case scenario is that a short-term bottom will lead to a trading range that could easily last into November before the correction is really over.

A V-shaped bottom is now looking less likely but I continue to expect the market to be higher by yearend. As I discussed last Friday, there are no signs that a bull market top is in place or that we are on the verge of a new recession.